Excerpt: - - 5. after the decision of the tribunal, the assessee unsuccessfully requested the tribunal to draw up the statement of the case and refer the questions of law to this court for opinion. prem bhai parekh [1970]77itr27(sc) would be clearly applicable. we are, therefore, clearly of the view that the tribunal was not correct in holding that jagmohandas was a benamidar for his father, manaklal, in the newly constituted firm, manaklal gordhandas',and that his income in that firm is the income of his father......terms of the dissolution, the share which manaklal had in this firm, was treated as a loan to a newly constituted partnership firm under the name 'manaklal gordhandas ', which was formed by ranchhoddas and one murlidhar on november 1, 1959. in this new partnership firm, jagmohandas, the minor son of manaklal, was admitted to its benefits. on the date of dissolution of the firm 'manaklal gordhandas', ranchhoddas took a sum of rs. 12,500 (rupees twelve thousand five hundred) for making a gift of this amount to his daughter's son, jagmohandas. the said amount was debited to the personal account of ranchhoddas in the partnership firm, 'manaklal gordhandas', on october 31, 1959. manaklal, the father of the minor, received this amount and deposited it in a bank in the name of his minor son......

'(1) Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that Shri Jagmohandas, the minor, is only bena-midar of his father, Manaklal ?

(2) Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that the share income of the minor, Jagmohandas, from the firm of M/s. Manaklal Gordhandas be clubbed in the income of his father, Manaklal, who is not a partner in the said firm ?'

3. Facts leading to this reference have been stated in detail by the Income-tax Appellate Tribunal (hereinafter referred to as 'the Tribunal'), in its order of reference dated August 21, 1973, and may briefly be stated as under :

Manaklal, s/o Motilal (hereinafter referred to as 'the assessee'). was assessed for the years 1961-62 to 1965-66, for the accounting period ending on Diwali of 1960 to 1964. Originally, he was apartner in the partnership firm of Manaklal Gordhandas in which he and his father-in-law, Ranchhoddas, were the only two partners. This partnership firm carried on business of sale and purchase of bullion and money-lending also. This partnership continued up to October 31, 1959, when it was dissolved. According to the terms of the dissolution, the share which Manaklal had in this firm, was treated as a loan to a newly constituted partnership firm under the name 'Manaklal Gordhandas ', which was formed by Ranchhoddas and one Murlidhar on November 1, 1959. In this new partnership firm, Jagmohandas, the minor son of Manaklal, was admitted to its benefits. On the date of dissolution of the firm 'Manaklal Gordhandas', Ranchhoddas took a sum of Rs. 12,500 (rupees twelve thousand five hundred) for making a gift of this amount to his daughter's son, Jagmohandas. The said amount was debited to the personal account of Ranchhoddas in the partnership firm, 'Manaklal Gordhandas', on October 31, 1959. Manaklal, the father of the minor, received this amount and deposited it in a bank in the name of his minor son. Later, on November 3, 1959, he withdrew an amount of Rs. 12,400 from this account in the name of the minor son from the bank and deposited it in the name of the minor in the account books of the newly constituted firm-In the newly constituted firm, the share of Ranchhoddas was fixed at 47 per cent. The share of profits of the minor, Jagmohandas, was also fixed at 47 per cent. The share of the remaining partner, Murlidhar, was 6 per cent. As regards the liability for losses, the agreement of the newly constituted firm was that Ranchhoddas was to bear 90 per cent, of the lossesand the remaining 10 per cent. of the losses were to be borne by Murlidhar.

4. When, the income of Manaklal, who had retired from the firm on October 31, 1959, was assessed as an individual for the years 1961-62 to 1965-66, the profits which the minor, Jagmonandas, earned in the newly constituted firm was treated as the income of Manaklal. The ITO held that Jagmohandas, who was admitted to the benefits of the newly constituted firm, was only a benamidar for his father, Manaklal, and that the income of the minor was to be treated as the income of his father, Manaklal. Consequently, in the opinion of the ITO, the individual income of Manaklal and the income, which his minor son, Jagamohandas, earned by way of profits in the newly constituted firm, were clubbed together and assessed accordingly. Against the order of the ITO, there was an appeal to the AAC, who held that the said income of the minor could not be treated as the income of his father. Against the appellate orders passed by the AAC for the years 1961-62 to 1965-66, the department preferred appeals before the Tribunal. The Tribunal held that the minor was only a benamidar of his father and his income was liable to be treated as the income of his father. While coming to that conclusion, the Tribunal held that the said amount of Rs. 12,500 was a gift from Manaklal to his minor son. However, subsequently, as per orders passed on the assessee's application, the said gift was treated as a gift not from Manaklal but from Ranchhoddas, the maternal grandfather of Jagmohandas.

5. After the decision of the Tribunal, the assessee unsuccessfully requested the Tribunal to draw up the statement of the case and refer the questions of law to this court for opinion. The Tribunal, by its order dated October 16, 1970, refused to refer the case to this court. The assessee then approached this court and as per orders passed in Miscellaneous Civil Cases Nos. 145/1971 to 149 of 1971, the Tribunal was directed to refer the aforesaid two questions of law to this court for its opinion. This is how the case has been referred to this court for opinion on the aforesaid two questions of law.

6. The contention of the assessee is that initially the Tribunal erred in holding that the said gift of Rs. 12,500 to the minor, Jagmohandas, was from the assessee and not from Ranchhoddas, the assessee's previous partner, in the dissolved firm, Manaklal Gordhandas. It is then contended that even after holding that the said gift was from the maternal grandfather of the minor, the Tribunal erred in law in holding that it was Manaklal who continued to be a partner in the newly constituted firm, 'Manaklal Gordhandas', benami in the name of his minor son, Jagmohandas, and that the profits earned by the minor in the newly constituted firm onNovember 1, 1959, it should not have been held as the income of Manaklal. Consequently, it was prayed that, in the facts and in the circumstances of the case, there was no justification, either on facts or in law, to come to the conclusion that Jagmohandas was a benamidar for his father, Manaklal, and the profits earned by him could not be clubbed with the income of his father as an individual.

7. Learned counsel, appearing for the revenue, urged that the question as to whether Jagmohandas was or was not a benamidar in the newly constituted firm of 'Manaklal Gordhandas' was a question of fact and not a question of law and that despite the orders passed by this court directing a reference to this court, the revenue could contend that this question being a question of fact only and not of law, could not be a subject of a reference to and an opinion by this court. Having examined the respective contentions raised by learned counsel for both the parties, we have reached the conclusion that the opinion on the aforesaid two questions has to be in favour of the assessee.

8. Facts which are not in dispute are that in the firm 'Manaklal Gordhandas', prior to its dissolution on October 31, 1959, Manaklal and Ranchhoddas were the only two partners. On the date of dissolution of this firm, a sum of Rs. 12,500 was debited in the account books of the partnership firm and paid to Ranchhoddas, who made a gift of this amount to his daughter's son, Jagmohandas. Jagmohandas being a minor, the amount was received by Manaklal who, after receiving this amount, deposited it in the bank in the name of his minor son. Out of this amount, an amount of Rs. 12,400 was withdrawn by Manaklal as he was the person authorised to operate this account on behalf of his minor son. The said amount of Rs. 12,400 was then deposited in the firm 'Manaklal Gordhandas' on November 3, 1959. On that date, Ranchhoddas and Murlidhar were the only two partners of this firm and Jagmohandas was, according to the partnership agreement, admitted to its benefits with a 47 per cent. share in its profits. The said amount of Rs. 12,400 has been referred to as the share capital of the minor in the newly constituted firm. Being a minor, he was not required to contribute any capital in the newly constituted partnership firm. Certain entries from the account books were filed in this court, according to which, this amount has been credited in the name of the minor and is not shown as a contribution of his share capital in the newly constituted firm. Whether it was an amount simply deposited by the minor in the newly constituted firm in his account or was by way of contribution of his capital, is not very material for this reference. It is, however, clear that it could not be as a contribution of his share capital because as a minor he could not be a partner in the partnership firm and being only admitted to thebenefits of the partnership firm, he was not required to contribute his share capital.

9. It is an admitted fact that the source of the said sum of Rs. 12,400 was the gift made to the minor by his maternal grandfather, Ranchhoddas. Ranchhoddas had withdrawn this amount from the old partnership firm prior to its dissolution and it was debited to his individual account in the partnership firm. Manaklal was thus not in any way concerned with the receipt of this amount from the partnership firm, 'Manaklal Gordhandas' before its dissolution on October 31, 1959. In these circumstances, the gift was from Ranchhoddas to his minor grandson, Jagmohandas, out of his own money. If the said gift had been by Manaklal out of his individual assets or out of his assets in the partnership firm, then a question could arise as to whether the investment of this money was by way of loan or as a contribution of capital in the newly constituted firm by Manaklal and, therefore, the said money should be treated as the individual money of Manaklal, father of the minor, Jagmohandas. On account of the said amount being a gift from Ranchhoddas, Manaklal did not come into the picture at all. Thus, on the facts, which are not in dispute, no question of Jagmohandas being a benamidar of Manaklal in the newly constituted firm, could at all arise.

10. In the view taken by the learned Tribunal, it has been held that since Manaklal's share in the dissolved firm was treated as an interest bearing loan to the newly constituted partnership firm and further since Manaklal had agreed to assist the newly constituted firm in realising its debts, the inference would be that in substance Manaklal continued to be a partner in the newly constituted firm also. We are unable to accept this view of the learned Tribunal.

11. Manaklal, as an outgoing partner of the firm, could either demand his share in the dissolved firm or agree to treat it as a loan by him to the newly constituted partnership firm. He elected not to take his share in the assets of the dissolved firm, either in cash or in kind, but agreed to treat the value of his share as a loan to the newly constituted firm repayable with interest @ 6 per cent. per annum. There was nothing unusual for Manaklal to agree to assist the newly constituted firm in realising its debts. These facts could not justify a conclusion that Manaklal continued as a partner in the newly constituted firm also benami in the name of his minor son, Jagmohandas. For these reasons, in our opinion, the Tribunal was not justified in holding that Jagmohandas was only a benamidar for his father, Manaklal, in the newly constituted firm, 'Manaklal Gordhandas,' of which Ranchhoddas and Murlidhar were the only two partners and the minor, Jagmohandas, was admitted only to its benefits.

12. Learned counsel for the revenue has relied upon the Supreme Court decision in Rai Bahadur Mohan Singh Oberoi v. CIT : [1973]88ITR53(SC) and contended that once the Tribunal has found as a fact that Manaklal was the real holder of the share of his minor son, Jagmohandas, in the newly constituted firm, this court by giving its opinion on the reference made to it, could not disturb the said finding of facts and has to accept it as correct. No doubt, in this case, it was held by the Supreme Court that once the assessee was found to be the real owner of the shares purchased benami in the name of his wife and two minor sons, it would be presumed that the ownership in the shares continued to remain vested in the assessee unless it was shown that because of some subsequent event he had ceased to be the owner of his shares. In the instant case, this court, by the order passed on March 30, 1970, had held that on the finding recorded by the Tribunal, questions of law do arise and it was in the light of this view that the Tribunal was directed to refer the aforesaid two questions of law to this court. The view taken by this court, in the order dated March 30, 1970, is therefore, binding on the revenue and cannot be reagitated in the present reference.

13. In the instant case, the decision in Rai Bahadur Mohan Singh Oberoi's case : [1973]88ITR53(SC) does not apply as there is no finding that the gift of Rs. 12,500 to the minor, Jagmohandas, was a gift from the assessee, Manaklal. On the contrary, the finding is that the said gift was by Ranchhoddas from and out of his own share which he held with Manaklal in the firm, 'Manaklal Gordhandas' which stood dissolved on October 31, 1959. Thus, so far as the assessee, Manaklal, is concerned, he was not in any way connected either with the gift made by Ranchhoddas to Jagmohandas or with the admission of Jagmohandas to the benefits of the newly constituted firm of 'Manaklal Gordhandas.' It may be mentioned here that as per the agreement of partnership of the newly constituted firm, the minor Jagmohandas was only entitled to a share in the profits of the firm. He was not required to either contribute any share capital or make any other contribution which ordinarily is made by a partner in a partnership firm. He also had no share either in the assets or the liability of the said firm. In the event of the partnership firm incurring losses, he was not liable.

14. In the circumstances and the facts of this case, the decision of the Supreme Court in CIT v. Prem Bhai Parekh : [1970]77ITR27(SC) would be clearly applicable. In this case, the assessee, who was the partner in the firm having a 7 annas share, retired from the firm on July 1, 1954. After the retirement, the assessee made a gift of Rs. 75,000 to each of his four sons, three of whom were minors. The firm was reconstituted from July 2, 1954. In the reconstituted firm, the major son became a partner and the minors were admitted to its benefits. A question arose as to whether theincome arising to the minors by virtue of their admission to the benefits of the partnership firm, could be included in the total income of the assessee under Section 16(3)(a)(iv) of the Indian I.T. Act, 1922. The Tribunal found that the capital invested by the minors in the firm came from the gift made in their favour by their father, the assessee. In the decision of the Supreme Court, it was held that the connection between the gift made by the assessee and the income of the minors from the partnership firm was a remote one and it could not be said that the income arose directly or indirectly from the transfer of assets. It was, accordingly, held that the income arising to the 3 minor sons by virtue of their admission to the benefits of the partnership in the firm, could not be included in the total income of the assessee. In the instant case, as found by the learned Tribunal itself, the gift was not from the father of the minor, the assessee in this case, and on the contrary, it was a gift from the maternal grandfather. There was, thus, no connection whatsoever between the gift made to the minor and the assessee, Manaklal. That was a transaction of gift independently of the assessee and it cannot be said that the profit which the minor earned in the new partnership firm were from any assets transferred by his father, Manaklal. Consequently, the gift being not from the father, the assessee in this case, it could not be connected with him for the purposes of assessment of his individual income. Similarly, the income which the minor received as the share of its profits in the newly constituted firm, could not be regarded as an income earned by the assessee, Manaklal, benami, in the name of his minor son, Jagmohandas. We are, therefore, clearly of the view that the Tribunal was not correct in holding that Jagmohandas was a benamidar for his father, Manaklal, in the newly constituted firm, 'Manaklal Gordhandas', and that his income in that firm is the income of his father.

15. In the light of the view that we have taken above, our opinion on the aforesaid two questions of law referred to this court is as under :

(a) In the facts and in the circumstances, the Tribunal was not justified in holding that Jagmohandas, the minor, is only a benamidar of his father, Manaklal, the assessee.

(b) In the facts and in the circumstances of this case, the Tribunal was not justified in holding that the share income of the minor, Jagmohandas, from the firm, M/s. Manaklal Gordhandas, be clubbed in the income of his father, Manaklal, who is not a partner in the said firm.

16. In the circumstances of the case, we direct both the parties to bear their own costs of this reference.